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China Petroleum & Chemical Corporation, or Sinopec Ltd, is a Beijing-based oil and gas company which is listed in Hong Kong, Shanghai and New York (NYSE: SNP). It is one of the world’s biggest companies by revenue. Sinopec Ltd’s parent, Sinopec Group is one of China’s biggest petroleum groups.

Business›Commodities

ENERGY

Sinopec cleared to build giant coal-to-gas project

Beijing signs off on approvals for plan with a total price tag to come, although chairman says pipeline network will cost at least 100b yuan

Sinopec's oil refining business will "markedly" improve in the second half, chairman Fu Chengyu says, after a revamp of the fuel pricing system is reflected. Photo: Bloomberg

China Petroleum & Chemical (Sinopec) has received Beijing's approval for a mega project to turn coal into natural gas as part of the mainland's strategy to increase energy efficiency and cut reliance on oil and gas imports.

Fu Chengyu, the chairman of the nation's second-largest oil and gas producer and the world's second-biggest crude oil refiner, said the project had received "all necessary government approvals", but the budget was not known.

"Since this project involves over a dozen provinces, the overall investment can be known only after a detailed feasibility study is completed," Fu said.

The project involves the construction of an 8,000-kilometre main gas pipeline from Xinjiang Uygur autonomous region to Zhejiang province through Guangdong. Five branch pipelines will also be built.

China is 90 per cent coal self-sufficient but imports almost 60 per cent of its oil and a quarter of its gas usage. Coal gasification subjects coal to high heat and pressure to turn it into gases, which are processed into natural gas and other by-products.

The total cost of the pipeline would exceed 100 billion yuan (HK$126 billion), Fu said, adding Sinopec would lead the project and be responsible for investing in 8 billion cubic metres of annual gas production and transmission capacity. Total capacity will be 30 billion to 36 billion cubic metres (bcm).

He said by converting coal to gas to fuel power plants, the energy efficiency in coal consumption would double to 60 per cent, implying less coal would be consumed and less pollution would be emitted, to generate the same amount of energy.

A research report by UBS estimated coal-to-gas projects to earn "internal rate of returns" of 10 to 13 per cent given recent drops in coal and steel prices, but warned of risks that higher carbon-dioxide emission costs in the future would cut returns.

It said the mainland would see a five to seven-year boom in coal-gasification projects construction, as Beijing has approved a large number of such projects that are projected to see gas output rise from 0.3 bcm this year to 55 bcm in 2020.

While there have been proposals to capture carbon dioxide to be emitted, use it and store it underground, analysts at UBS said: "We do not believe any of the proposals are sufficient to handle the scale of carbon dioxide that may be ultimately discharged by the new coal-to-gas and coal-to-chemicals projects."

Meanwhile, Fu expects the profitability of Sinopec's oil refining business to "markedly" improve in the second half, after it posted a first-half profit of 213 million yuan, after a loss of 18.5 billion yuan in the year-earlier period, as benefits from a revamp of Beijing's fuel pricing system in April were fully reflected.

President Li Chunguang said its refining operation had a first-quarter profit of 2.2 billion yuan, but it sank into the red in the second quarter due to a write-down on its crude oil inventory.

This article appeared in the South China Morning Post print edition as Sinopec cleared to build giant coal-to-gas project